Right now, we are going to hear the thoughts of five prominent individuals as they speak about Armen's influence as a teacher, researcher, coauthor and colleague. Two of the people here are Nobel prize winners; Bill Sharpe had Armen as his dissertation advisor, and incidentally he also had Harold Demsetz on his committee, so this is kind of old home week for him; Jim Buchanan, another Nobel prize winner, had Armen as a colleague; Axel Leijonhufvud has been in the same economics department as Armen for thirty years. Others have had him as a teacher, like Bob Topel, and as both a colleague and as a coauthor, like Harold Demsetz.
I thought I would take advantage of my position as moderator and organizer to reflect personally on what Armen has meant to me. He may not want to own up to the responsibility for the blame or credit that I attribute to him. When I was in high school, the summer after my sophomore year, an economics professor moved in next door to me, M. Bruce Johnson (who teaches now at the University of California at Santa Barbara). I went over and asked Bruce what types of economics textbooks I should look at, and he gave me seven of them. I think the first three that I looked through seemed okay, but they were nothing particularly exciting. Then I got to Armen's textbook with Bill Allen, University Economics, and I think that book was responsible for me not only becoming an academic but also deciding to go to UCLA. It is hard to explain now, though I guess some of you can relate to how exciting reading the questions in the back of the chapter were. Whether it be things like "Why Rose Bowl ticket prices are set low so that they have more people demanding them than the supply of tickets available?" or the shipping of good apples out; or why rent control results in students not obtaining apartments, but elderly old ladies who are less likely to damage the apartment buildings.
The amazing thing was that such clear and simple insights could provide such powerful implications, and it seemed amazing to me that people could actually go and earn income thinking about such fun and interesting problems. I suppose that was responsible for me wanting to become an academic.
To give you an idea of the youthful enthusiasm that I had, I decided at that point I was going to UCLA. My mom, who was living in Miami, felt that California was a dangerous place all the way across the continent, and she was unwilling to let me go there. So I went to school in the south for a year and then for my sophomore year I said, "Well, it's still a plane trip away, it's still going to be a plane trip away in California, it can't be much worse." So, I ended up at UCLA. Less than a week after I had moved there, I went over and knocked on Armen's door because I wanted to go in and offer my services and see if he would be willing to hire me for a research assistant. He was not in his office, and so I went over to Bill Allen's office and I knocked on the door, and he was in. So I told him how anxious I was for him to hire me as an RA, and he said, "How about .50 an hour?" And I said, "oh that's great!" I didn't notice at that time that Clay LaForce had walked in behind me, and his response was, "Bill, I think you're paying too much."
The other thing I wanted to relate briefly was the third lecture that Armen gave in his graduate Price Theory class. I'm not sure how many of you can relate back to one lecture in one class that so completely transformed your views about economics and served as the guiding light for your research in the rest of your career, but I think I can relate back to one lecture in my own case. That was when Armen defined the notion of efficiency. He defined efficiency as "Whatever is, is efficient." If it wasn't efficient it would have been something different. Of course, if you try to change anything that is there, that is efficient too.
I suppose the best way to relate this to you is to point out something like the question of optimal taxes. Armen would ask the question, "If something is so optimal, why don't we see it then?" The notion was essentially that there must be other costs that you left out of your model; either costs involved in the political system, in organizing support, or in changes for this other solution which might seem to be such a low-cost option. And the basic point of his argument was, why are we weighing only some costs and not others? Why are these costs (involved in minimizing that particular dead-weight losses that would be involved in setting a particular tax) less important than other types of costs (those involved in informing people of what the options are or of organizing them to go and try to adopt the alternative option)?
I think it's important to understand that type of lecture in order to realize the effect it had on so many graduate students there and the divergent effect it had on so many people. People would come in, like Walter Williams, who in my understanding was kind of a leftist or even a Marxist when he first went to UCLA, and anybody who listens to the Rush Limbaugh show from time to time and hears Walter filling in for Rush can notice that there has been some change that has occurred over time. There are testimonials from many other UCLA Ph.D.s. Ted Frech, who I was talking to a few months ago, told me he was a rabid libertarian when he went to UCLA and now he is kind of confused, or at least less certain of his libertarian ways than he used to be, and that is basically because of the type of lecture I was just talking about. You can say, "This is the way the world should be." But then the question comes up, "If that is so obvious, why isn't the world like that?"
The individuals here I am sure want to talk, and I don't want to tread too much on their time. Bill Sharpe is the next person we have here; Bill, would you like to come up here?
Bill Sharpe: John asked me if I would be willing to come up and mainly reminisce. He did actually give me another assignment, but I can't remember what it was and didn't undertake that. I am going to undertake the first assignment which is by far the more pleasant and more personal, to reminisce about my days as a masters student when I took Armen's course in 1956, when he was a relatively young associate professor. First let me say that Armen, along with Fred Weston and Harry Markowitz, I count as my three mentors, and Armen in very, very large part, so I owe a great deal to him. That being said, there is a tendency, as I'm sure you know, on occasions such as this for speakers to gush and become overly saccharin, and I want to avoid that as much as I can. On the other hand I don't want to do a Friars Club roast.
One of the things you do when you get to this stage in your career is to recycle your earlier material and engage in what could be called self-plagiarism. On two occasions, people were foolish enough to ask me to write a piece on how I got "this way," (whatever this way may be). And on those two occasions, I of course said something about Armen. So I am going to read you what I wrote on other occasions about Armen, presumably away from this particularly emotional and hot-house situation.
First, something I wrote in 1990 which you will see is the more formal of the two. "Armen Alchian, a professor of economics, was my role model at UCLA. He taught his students to question everything, always to begin an analysis with first principles, to concentrate on essential elements and abstract from secondary ones, and to play devil's advocate with one's own ideas." (Let me say parenthetically, I think that's probably the most important of the lessons that Armen taught.) "In his classes we were able to watch a first-rate mind and work on a host of fascinating problems. I have attempted to emulate his approach to research ever since."
All of this was true in 1990, it was true in 1956, and it is certainly true today.
Let me now quote from another of these pieces, one that I wrote in 1992. "It was during this year [1956] that I irrevocably crossed the line to become an economist, much of the credit or blame for which goes to Armen Alchian, who taught the graduate microeconomics sequence at UCLA. While personally gentle and traditional, Armen was and is clearly an eccentric economic theorist. He started the course by asserting that 95 percent of the material in economics journals was wrong or irrelevant. He then proceeded to discuss the economics of the illegal market for buying babies. At one point, he spent five or six lectures wrestling somewhat unsuccessfully with the meaning of profit. Indeed, most of his classes had that characteristic of a wrestling match. We witnessed a brilliant mind grappling, usually very successfully, with the most difficult concepts in economics in creative and innovative ways. There could be no better training for a fledgling theorist and no higher standard. After two semesters with Armen Alchian, I was hooked, I wanted to be a microeconomist."
In my time at UCLA (which I suppose was a simpler time), all the teaching assistants had one room with a bunch of desks and a blackboard. We would all go to Armen's class, then rush to the room, race to the blackboard, and typically spend several hours trying to figure out just what had gone on--trying to unscramble all of this very difficult material. I think those sessions were, next only to Armen's class itself, the most important part of my education at UCLA. It was this process--Armen provoking and the rest of us trying to understand, expand, and consolidate--which made economists out of some pretty raw material at that time.
I also want to say a little bit about the textbooks, because the textbooks are a reflection of the material to which we were exposed. As you know, there is University Economics which includes both microeconomics and macroeconomics, and then the micro-only portion published under the title Exchange and Production Theory in Use. In just flipping through the latter in the last day or two, I was rather appalled to find a number of ideas which I thought I had invented. l guess that is the mark of a good teacher, that you are taught so well it becomes subliminal and you think in later years that you came up with the ideas yourself. I have a quote for you, from a book called Economics and Charity. (Computer searches are wonderful things; I turned up this book when I said "Alchian" to my computer.) In it is a small excerpt, slightly Anglicized, from University Economics. The editor of Economics and Charity called University Economics, "perhaps the most penetrating introductory economics textbook in the English language." It appears that he was hedging his bets; I wondered if he thought that another language had a better book. In any event, there is no doubt that it really is a remarkable book. I taught from University Economics at the University of Washington and experienced, as many of you have, how difficult it is to use a textbook with undergraduates that sings the praises of unfettered market solutions to allocating resources. If you look at the book, you will see that both Armen and Bill Allen were very, very careful to say formally over and over, "Now look, there are many ways of looking at these problems. Sensible people may well disagree as to the efficacy of market solutions as opposed to ... " (command economics, as we would say today). But somehow or other, the students were able to discern just a tiny bit of a preference on the part of the authors for market solutions. That approach, in today's terminology, was kind of "in your face" economics. And I commend that term to you as you think about the kind of things Armen does. I might also say that some of it borders on what would be politically incorrect, at least in the kinds of institutions you read about in "Doonesbury."
It won't surprise at least some of you that I was particularly enamored with Armen's work on allocating goods over time and allocating risk among members of the society. You will find all of that discussed in particular in the text circa 1964, but he was dealing with those issues much earlier. At the time, microeconomics textbooks resolutely preceded as if the world was one of certainty. The notion of uncertainty was just not something you found in a microeconomics text, or indeed, in many economics departments. This now seems ludicrous because uncertainty has permeated not only mainstream economics, but also the field that we call financial economics. But it was not standard at that time, and Armen's work, in the literature, in the course, and in the textbooks, was really instrumental in beginning that movement. Here is a quote from the 1969 edition of Exchange and Production that shows how current the material is. "The news spreads that the next coffee crop, now blossoming in Brazil, has been nipped by unseasonable cold weather. Immediately the flow of coffee out of current stocks of consumption is reduced, therefore the current price of coffee to consumers will rise as coffee is released for current consumption." As you probably all know, that is precisely what happened in recent months. And what we now await is the prediction that Armen made that there will very soon be calls from political and other quarters for the heads of the speculators who have caused everyday working people to have to pay more for their coffee when in fact "nothing" has changed.
Let me give you one more personal anecdote that brings home what an unusual man we honor today. When I took my Ph.D. oral exam, Armen and two of his colleagues proceeded to ask me question after question, not a single one of which I could definitively answer. The only person who asked any questions to which I knew the answers with any assurance was Fred Weston, who came late to the dissertation. After two or three hours of living hell, I was dismissed, and went out to await the verdict. And the minutes passed, and passed, and passed; I was going down the list of other careers I might pursue. Eventually Armen appeared and I braced myself for the response. Armen said, "Well, of course you passed, but I suppose I should tell you that the three of us, before you came in, decided that we would ask you questions to which we didn't know the answers because it would just be a lot more interesting. And we got so excited that the discussion went on and we forgot to come out and tell you the verdict."
Armen Alchian: truly unusual economist, an innovator, a major contributor, a superb teacher, and one to whom I owe a great, great personal debt.
Armen, Happy Birthday.
John Lott: our next speaker is someone I am sure you all know, Jim Buchanan, who was a colleague of Armen's briefly in the late 1960s at UCLA and has known him in many other contexts.
Jim Buchanan: I appreciate the opportunity to come here and join this tribute to Armen. As many of you know, I am on record as classifying Armen as the best blackboard economist I have ever known. And I refer here to Armen's unbounded curiosity in the face of any problem posed to him and to his willingness to help anyone who stands confused, and, finally, to his ultimate confidence in the economists' tool kit. The challenge to Armen is always in the chase. Give him a problem and he will, with a bit of blackboard exercise, come up with some solution. I thought the analogy with the wrestling match, that Bill mentioned, was very good. I look back with fondness on my brief time at UCLA when Armen shared the office next door. I would go next door and Armen would immediately go to the blackboard and really work out whatever problem happened to be bothering me. And of course those sessions were exciting and interesting, but they got much more exciting and interesting when Earl Thompson happened by. Then they went on and on and on.
At the end of these brief remarks, I am going to give Armen a problem, one for which the several explanations I have heard do not seem convincing. But John Lott instructed me to do more than that. I was told to try to develop a constructive argument within a few minutes here assigned to me, an argument that might be related to Armen's contributions. And perhaps predictably, my starting point is Armen's seminal 1950 paper on profit maximization as a survival strategy, behavior that exhibits evolutionary stability in a competitive economic environment. Now let me digress to say, for most of you this will not seem as seminal as it does to those of us who were around in 1950. As I was noting to Jack Hirshleifer last night, evolutionary thinking permeates economics and it is now becoming a very natural way of thinking, but nobody thought about evolutionary processes in the 1950s. It's part of the intellectual environment in social sciences, and this makes it difficult to appreciate the genuinely innovative quality of Armen's 1950 enterprise.
I think we need to recall the analytical setting out of which the Alchian paper emerged. In the late 1940s economists had witnessed a fierce controversy within their own ranks between those who used behaviorally descriptive evidence to suggest that firms do not maximize profits, at least in accordance with the textbook calculus--people like Lester, Hall, and Hitch, on that side of the debate--and they were opposed by those who extended the precepts of ordinary rationality to deduce profit maximization as a part of rational choice. Here you think of Fritz Machlup. Armen Alchian's point in his 1950 article, which now seems simple enough, was that the controversy was essentially irrelevant. In order to survive, firms must behave so as to cover costs, which Ronald Coase had told us much earlier, although none of us were then familiar with the argument. Ronald Coase had told us that to cover cost is the same thing as maximizing profits anyway. Behaviorally, the Alchian survivalist definition for profit maximization may not seem to get us very far, but I think that Armen really intended to suggest the enormousness of the implications for allocative efficiency that followed from that. Now this interpretation of Armen's purpose does provide, it seems to me, a link with his work in the late 1950s and 1960s, work that introduced the incentive incompatibility resulting from the attenuation of property rights of the decision makers. Some of this work was done jointly with Reuben Kessel. Those of us who are old enough will remember Armen's excitement and discussion about his examples that he drew from the nonproprietary sector where property rights were attenuated, with his hypothesis about the Ford Foundation having prettier secretaries and thicker carpets than profit maximization would suggest.
But I want to come back to the initial model and try to unravel the survivalist criterion in terms of its implied behavioral limits. I want to suggest that the normative status of this criterion may be quite different in differing institutional settings. Patterns of behavior that ensure survival in the technological complexity of today's extended, but highly politicized, markets may not, independently of some ethical reinforcement, carry with them the normative implications that emerged so clearly in the stylized textbook constructions. Think first then about a setting in which all the participating units, whether individuals or firms, are engaged in a continuing sequence of trades or exchanges. Here, Adam Smith's discipline of continuous dealings will surely ensure that firms which survive will be those that maximize profit without exploitative practice,--deliver value for money, in other words. Consider by comparison a setting where there are few if any repeated interactions between buyers and sellers. And here you think immediately of the service station along the interstate highway. Like many of you, I suspect I have been taken by one or two scams in my life on that, either on shocks or alternators or whatever. once or twice, I learned and was not taken anymore, but I was taken. Here the disciplinary feedbacks are quite different. Now of course marketwide trademarks and brandnames emerge to substitute for more disciplinary feedback, but the scope for opportunistic behavior is at hand.
More generally, I think there is cause for concern, or at least for further inquiry, as technology develops so as to create further erosion in the continuity of buyer-seller relationships and to replace personal by impersonal dealings. And this concern is exacerbated by the accelerated potential politicization of any and all transactions. Some of us are not nearly so sanguine as Gary Becker about the efficiency enhancing properties of political competition, and I must say I was a little bit worried by John Lott slipping over into that today in some of his remarks. The rent seekers who survive and prosper may not be behaving so as to ensure that resources are moved to their most productive uses.
At this point, I think it might be useful to refer to Hayek's introduction of cultural evolution. Specifically, think about the possibility that many of the behavior traits that we now observe may well have evolved in commercial settings in which survival depended on the maintenance of mutual trust among traders. My concern is whether such standards of trust and respect are dictated by the technological and political superstructure in the modern economy. Is it not possible that there has already been some erosion in the effective strengths of the disciplinary feedbacks so as to make survival alone carry less normative implication than it did in earlier periods? Despite the dramatic reductions in transactions costs that the extended market facilitates, along with the enhanced availability of the exit option, just how dependent are we on those codes of conduct, to use a Hayek term? How dependent are we on those codes of conduct that few of us understand, without which our economy might not function nearly so well as it does? Social critics of the market and of market evaluation, that is, the socialists who will always be with us (we might have thought their zeal would be a bit tarnished by the mid-90s, but it does not seem to be tarnished nearly so much as might have been predicted). They will always continue to equate profit maximization with opportunistic exploitation of each and every buyer and seller relationship in each and every exchange. And I think it should be incumbent on us as economists to identify the flaws in such a vision. The profit-maximizing behavior that survives in the appropriately defined institutional setting does carry normative implications as implied in the original 1950 Alchian paper. But the proviso there is all important. As political economists, we should pay more attention to what the appropriately defined institutional setting is and must be.
Finally, and as I promised you, let me pose a problem to Armen Alchian, the problem of the familiar and much discussed CEO stipends. To me the theories of marginal productivity, the theories of noncomputing groups and theories of tournaments, which I have heard as explanations here, do not measure up. And I would like to pose to Armen, just how do we explain what we now observe? Thank you very much.
John Lott: our next speaker is someone who has probably known Armen for the longest continuous length of time or at least has been longest in the same department as him, and that is Axel Leijonhufvud.
Axel Leijonhufvud: Continuity yes, but complexity no. I should explain that Harold Demsetz substituted for me in the morning session, and so I am here in my capacity as substitute for Harold Demsetz. In what capacity he is here, I can't say.
I came to UCLA in 1964 so I have been Armen's pupil and colleague for thirty years. Through the 1960s and 1970s, the UCLA economics department was Armen's department. You associated UCLA with Armen the same way you did MIT with Paul Samuelson or Chicago with Milton Friedman. These decades when Alchian was the intellectually dominant figure were also the years when UCLA economics had an independent intellectual profile in the profession. UCLA then was like no other school. It's distinctiveness, and the significance of it in the larger scheme of things, was for some reason better appreciated in Europe and generally abroad than in the United States. But UCLA in Armen's great days was not just a school where we tried to do economics the way it was done in Cambridge, Massachusetts and in Chicago, and did it almost as well; it was a different place. We had our own segment of the frontier of the subject.
Like others who have had the privilege of being Armen's students and colleagues, I have learned a great deal from his ideas. Indeed, I probably have learned more than I can honestly account for, because much of what Armen taught has become second nature to me. Looking back, I find the manner in which Armen exerted his influence just as interesting to reflect on as what his influence was. When we categorize Armen's work, we stress first property rights and contracts theory as his main subject areas perhaps and incomplete information and transactions costs as the characteristic conceptual tools.
But to understand Alchian's importance, it will not suffice to enumerate original insights and ideas that were specifically his. You have to realize that he, more than anyone else (and I would include Ronald Coase), made property rights, contracts and business practices in general into the field of study that they have now become. And he did so by multiplying the questions that price theory could and should address--and by making us understand how interesting these questions were.
Most of the people present today, I think, will have a hard time realizing what microeconomics was like thirty years ago because you were not there, and the rest of you will have a hard time remembering because it was a long time ago. Jim Buchanan has a good memory actually, he remembered what it was like in the 1940s, when he said no one thought of economics in evolutionary terms in the 1950s. What I learned in graduate school ten years later than that time was arid stuff, trivial optimization exercises combined with equilibrium conditions that had no foundation in any examination of how actual markets work. This was not the fault of my teachers--this was the state of the art in the profession in general.
But at UCLA, there was Alchian, full of curiosity about actual, everyday business practices: Why do people do what they do? Why is the practice this or that? Always observing. My theory courses were deductive. You started from convexity and continuity assumptions and the like and built elaborate structures in that way. Armen came at it from the inductive end, from observation always.
Let me mention his work on production functions and cost curves as an example. It often seems to me that hardly anyone has really studied production the last sixty years or more. Marshall used to visit factories to understand production, and so did Karl Marx before him. But once the Cobb-Douglas was invented, economists have been doing production theory by sitting in their offices and taking derivatives on the damn thing and never looking outside. Armen is one of the few exceptions. His work in this area stems from the work on airframe manufacturing that he did at Rand during the war. What he found, of course, was that the production sets that he was dealing with were not convex in all dimensions. And if that work of his had the influence that it should have had or might have had, production theory would today be very different. We might be studying production in an empirical way. I would say, by the way, the "learning-by-doing" interpretation popularized by Ken Arrow is one that makes Armen's work look fairly harmless from the standpoint of standard theory, and that Armen's work is more subversive than it appears in Arrow's version. So Armen taught us at UCLA that there were whole classes, rich classes of questions, that price theory could and should address. That was his great importance to us.
Now for those of you who had the privilege of associating with him, there was something else that was equally important, at least speaking for myself. There was not only the influence of his questions, and the influence about how he went about finding answers, but the manner in which his influence was exerted over students and over colleagues. What always comes first to my mind in thinking about him is his personal lack of pretentiousness, lack of self-importance and pomposity. I learned from Armen to (I hope) take economics seriously, but not to take economists too seriously. Armen always had this tolerant amusement at the overweening ambition and pretentiousness, and what the British call puffery, of economists, academics in general, and public figures talking about economics. If Armen's own attitude was more prevalent, economics would not have turned from a scholarly endeavor into the competitive sport that it often resembles today, where what counts is what league you're playing in and who can get the most papers into the most prestigious journals.
You are asking, why would I stress unpretentiousness? Can unpretentiousness be an important quality? In Armen Alchian's case I think it has been important in at least three respects.
First, I feel that it is at the bottom of Armen's so-called conservatism. This amused skepticism extends into a skepticism in general of people who claim they will improve the world by using the powers of the government. This was an unpopular attitude back then, far more unpopular than it was in the 1980s. But it was a personal attitude that I perceived as very, very different from the hard-edged ideological conservatism of the 1990s of the libertarian conservatives. Because Armen's amused skepticism extended also to those people who would say, "I have a method for improving the world, abolish government."
Now it is important in another way, because his lack of self-promotion and his abstemiousness from it I think is what more than anything else has kept him from the Nobel prize so far. I can find no other explanation of the behavior of my countrymen. He will, of course, be amused at my saying so, thinking me pretentious on his behalf. My third point brings me back to where I started, to intellectual independence. It is intimately connected to the lack of self promotion that I have just mentioned, but this kind of independence is a good deal more important in the scheme of things. While there were individuals whose opinion of his work mattered to Alchian, his motivation for doing economics was not to gain approval by the profession or influence in public life. It was curiosity, to put it simply--the striving to understand what you realize you do not fully understand. To me and many of my colleagues, this attitude of Alchian's set the tone of the UCLA Economics Department, and we experienced the ambience as one of both intellectual independence and openness.
The openness of the place to new ideas was often not appreciated by outsiders. Let me simply recount my own experience. When I was in the market for graduate school, my choices eventually came down to Yale or UCLA, and back at that time the difference in the perceived professional prestige between the schools was much larger than subsequently. When the rumor went around Brookings, where I was for that year, that I was going to go to UCLA, a very well-known economist came to me and put his hand on my shoulder and said, "Axel, I hear you are leaning towards UCLA. I have something you must think about. With your Keynesian interests, you will never be happy at UCLA." The very opposite was the case. I came to UCLA with no particular intention of staying for a long time, I thought I was going back to Europe for one thing. But I came to UCLA a loyalist and have stayed one until today. Alchian's UCLA was the right place for someone with my interests. I'm not at all sure that my kind of Keynesian interests would have flourished in the citadels of that era's Keynesianism.
If in the microeconomics of the 1960s, few people thought about contracts, property rights and business practices, in the macroeconomics of the 1960s, no one, but no one, talked about information. You can not imagine how completely lacking from the literature this was unless you take the time to go back and read a broad sample of the stuff and what it was like then.
When I came to UCLA I was a bit shyer than I am today, so I was sitting in my office trying to make sense of Keynesian economics and its relationship to microtheory by thinking of the economy as an information network where things could go wrong under certain conditions. But I didn't have very much confidence that my way of thinking about it was right or a fruitful way to go, and without Armen's support and encouragement, I doubt very much that anything would have come of it.
This came about in a funny way because back then students used to tape your lectures. You would often find yourself talking to a line of tape recorders in the front row with students sleeping peacefully behind. Armen had this habit of spying on us assistant professor types by borrowing the tapes and playing them when he was driving in his car. So he heard some tape of mine where I was worrying about price adjustments in competitive markets in this macro setting, and arguing that price adjustment velocities couldn't be infinite generally speaking, and that the notions about flexibilities and inflexibilities in micro were not well defined. And so he came to me, I had not dared come to him, and borrowed some of the pieces of manuscripts that I had. Then he gave me out of his desk drawer his classical paper on "Information (Costs, Pricing and Resource Unemployment," that eventually appeared in the famous Phelps volume that played such an important role in changing how microeconomics was done. And I learned a lot from that and from the long discussions we had.
The final point I now want to make is this. Why was this paper in his desk drawer? I have no idea how long it had been there, but the version I got was pretty yellow. I think of this every week because papers come across my desk today and you know what they look like. The author says, "Now here is a somewhat puzzling phenomenal." And then says, "I will make a few ad hoc assumptions and I will take tine' license of as-if methodology, which allows me to do anything, and then I will show that there is at least one possible optimizing model that exists that really implies this phenomenon or my characterization of this phenomenon, and now I am ready to go into print." Armen started from a set of phenomena that he had observed, and figured out a plausible explanation--model, if you want, of these phenomenon--and then put it into a drawer. over time he would think of more behavioral phenomena that would fit this explanation, but he would wait for such confirmation by empirical evidence, confirmation by phenomena that was not part of the original question. And if we had the same discipline today in the profession as the self discipline that Armen put into his work, the volume of publication in economics today would be cut to a small fraction of what it actually is and our lives would all be easier.
John Lott: on that wistful last hope, I would like to turn to Bob Topel. Bob was a graduate student at UCLA, and he has become one of its few most successful Ph.D.s, and that alone would be sufficient to include him in the prestigious company that we have here. But I had the opportunity to sit in some classes that Bob taught at the University of Chicago in 1980, and. I have to say that out of most of the people whose classes I have had the opportunity to sit in on, Bob's style reminded me very closely of Armen's. It was Socratic, probing, demanding of the students when they say something that they justify what they meant by the terms they used, and relentlessly giving them a tough time whenever they would be willing to open their mouth. And if they didn't open their mouth, he would cold call. on them. But anyway it's primarily because of that, despite the other reasons, that I also include Bob in this.
Bob Topel: My wife recently described to me the first time she met Armen. It was in Hawaii over twenty years ago. Making small talk, she asked if Armen had been to Molokai, which she said was very beautiful and interesting because of the former leper colony there. Armen asked, "Does it have a golf course?" "No," she replied. Said Armen: "I'm not interested."
It's a special honor for me to be asked to present some comments in honor of Armen Alchian's 80th birthday. But the episode I just described makes me suspect that the speakers get greater "personal value in use" (as he would put it) from this gathering than Armen does, who I'm sure would rather spend his time doing something else. So, I am going to lead with what might be the only thing any of us will say that will capture his imagination.
Armen, on Monday I will play Royal Lytham St. Anne's, a British open course, in the Lake District of England. I plan to shoot your age.
[Postscript: I failed.]
Years ago, when I was a graduate student, our late friend and golf partner George Stigler spoke at another birthday celebration for Armen. He recalled how he had started Milton Friedman's career by holding up a copy of Pigou's Economics of Welfare and saying, "Milton, there is a mistake in this book." With this in mind, I picked up my copy of Armen's collected works to look for a mistake--there is one--and to renew my perspective on what kind of an economist Armen is.
To me, the unique thing about Armen is his unquenchable desire to understand the things he observes in the world. Armen is not a theorist or a model builder in the usual sense. In fact he does not suffer theory lightly, though he has a powerful paragon that he applies to real world problems. He is not an empirical economist in the modern sense either. Beyond the number of Jews working for public utilities, there isn't much hard data or formal testing in Armen's papers. Armen simply seeks to understand without trying to show how clever he is. All of Armen's papers--from his classic on evolution to his explanation for why we professors have tenure (because we like it)--have this approach. Why do people do one thing and not another? Why are businesses organized as they are? Why have certain institutions arisen, and what role do they play? These are not the questions of a crusading economist who wants to change the world, like Friedman; they are the questions raised by a scholar who would simply like to understand the world, like Stigler. Armen taught us to approach economics the same way, with a physical scientist's intense desire to understand the way things work. Armen is an extremely clever man, but I count as one of the great virtues of his work that it contains no cleverness for the sake of being clever.
For many, Armen's classic papers are "Evolution" and his methodological piece on utility measurement. These are nice, but my favorite is his paper on information costs and resource unemployment. It challenged the profession to apply tools of optimizing behavior to understand a whole range of problems related to unemployment and the apparent failure of markets to clear. Many of the arguments in this paper were compelling, some less so. But the major contribution came in his approach to the problem. This was extremely refreshing, bridging the gap between the firm foundations of microeconomics and the dull ad hocery that then passed for macroeconomics. It affected the way I think about everything, and its theme runs through the work that I have done on unemployment. This paper had a lasting and enormously positive impact on our profession.
Looking over the list of speakers, it appears that my role is to say something about being a student in Armen's department. I have a few stories.
I'm a bit of an odd choice to speak about Armen. Unlike generations of UCLA graduate students, I was never enrolled in a single class that Armen taught. Yet, like all of the other students at UCLA from the 1950s through the 1980s, Armen had a tremendous impact on my education and on the way I think about markets and institutions.
I started my graduate studies at another school. Axel and Harold attended the same one, but only I had the good sense to leave it so I could be educated by them. (Also, it didn't have palm trees.) In pondering this move, my advisor (who is a famous theorist), told me that UCLA was okay and that Alchian in particular was probably good enough to have a job at Chicago's Business School. This was high enough praise for me, and given the way my career turned out I like that opinion even more today.
So I went to UCLA and tried to pass myself off as a second-year student. Now such was my naivete that I thought graduate courses would be pretty much the same no matter where you took them. So I decided to take the Ph.D. qualifying exam in economic theory. Armen was the chairman. Just to be on the safe side, I went to Armen's office and showed him my well-pondered and well-marked up copy of Malinvaud's Lectures on Microeconomic Theory. I told him of my thorough understandings of all the results in Arrow and Hahn's General Competitive Analysis. With a completely straight face, Armen told me this was excellent preparation, and that if I also understood everything in his principles book I would have no trouble at all. And he shut the door.
I was greatly reassured.
When the important day came, the exam was Armen at his best. He began by saying, "There are twenty-eight questions on this exam. Answer them all. There is no time for thinking: you should have done that during the previous year." I sensed right off I was at a disadvantage. The questions were all of Armen's favorites, which I subsequently came to know and love, but about which I hadn't a clue at the time. (of course some macroeconomics ,was appended to the exam, but everyone knew it didn't count.) Things did not look good.
My confidence rose enormously, however, when a particular question caught my eye. It was about a theorem, and I was sure there were no important theorems in economics that I couldn't prove. Kakutani, Brouwer, Minkowski or Hestenes; I was ready for anything. The question read: "State the Coase theorem and explain why it is important." Who was this obscure mathematician Coase and what important theorem could he have proved? It wasn't a good day.
I ultimately recovered from that educational setback by hanging around Armen's class and by teaching from his book. His original advice was right: you can be a pretty good economist by knowing what is in his principles book. In fact, my publisher calls Alchian and Allen a terrific principles book for people who already have a Ph.D.
Any graduate student will tell you that Armen's class was something. He came straight from the golf course on a mission to make you realize how little you understood. He was a man who announced on the first day: "If you people were any good, you would have gotten into MIT. So you aren't any good. We will make economists out of you anyway." He would single a student out and ask him a question. Then two things could happen. First, you could answer incorrectly, in which case Armen would drag you through his inexorable logic until you did it right. or, if you got it right, he would change the assumptions and put you through the same thing. You were wrong and he was right. It was really quite simple once you caught on.
Armen even used class to demonstrate important principles. Ben Zycher, who was around when I was, created externalities by asking too many questions. There being a lack of property rights in the room, we needed either a social planner or some prices. of course the former wouldn't do, so Armen charged Ben a quarter for every question he asked. From this I learned a very important principle of economics: rectangles are much bigger than triangles. Ben asked just as many questions as before, and Armen got a big stack of quarters.
Armen's influence at UCLA went well beyond the classroom, however, and beyond the articles he wrote. Armen was a presence. The UCLA department in those days was Armen's department. Alchian defined the intellectual environment at UCLA, even for those students that never interacted with him directly. Students learned economics by hanging around and tackling problems together. More often than not the problems we tackled, and our approach to them, were Armen's.
My comments may have left the impression that Armen cut an intimidating figure among the students, and he did. But that is Alchian's educational style, and we all knew it. We knew him to be the charming and kindhearted gentleman that we honor here today. My fondest memories of Armen come from my one year as his colleague at UCLA in 1985-86. If I circulated a paper, Armen's copy would come back the next day covered with comments. Then he would stop by the office to argue about it. I loved it.
I have said enough. Happy Birthday, Armen, may there be many more. You should view this milestone as an opportunity to shoot your age. I look forward to hearing that you have done it.
John Lott: Thank you very much, Bob. The last person that we have here is Harold Demsetz, a coauthor of Armen's, with a slightly different perspective on things.
Harold Demsetz: Thank you. I am here today as a utility infielder. John called me a night or two ago, saying he thought he had more time in the session than the words you four were going to say. I thought to myself that John hasn't been around the profession long enough to have a good appraisal of the speaking prowess of academics. But nonetheless, I agreed to put together a few notes about Armen just in case, only thirty pages.
First, Armen, let me congratulate you on surviving for eighty years. Some of you may not know that this is a very remarkable achievement given the terrible stock tips he has given his colleagues over the last several years. I always considered myself lucky and privileged to have the office next to Armen's except for these stock tips.
My introduction to Armen's work took place forty years ago when I was working on my Ph.D. at Northwestern University. The theory course was taught by Bob Strotz who then was much involved in utility theory. Armen's article explaining cardinal utility was on the reading list. The paper was well crafted and intelligible, and it really did help me pass the course, but neither it nor cardinal utility nor the course was much help after that. Armen showed good judgment in dropping this line of inquiry. He also gave a seminar at Northwestern in which he dealt with an old topic, production cost, that has been referred to by other speakers, and especially by Axel. Theorists had left this topic untouched after Jacob Viner's assistant had convinced him that only at the bottom of a long-run average-cost curve would minimum short-run average costs equal long-run average costs. Whereas Armen's article on cardinal utility was purely expository, his seminar on production costs was very innovative. It appeared in 1959 in his notable article on costs and outputs, and is part of Armen's work on the economics of the firm. Since we both worked on the firm, I will focus on this part of his work.
Neoclassical theory treated costs only as a function of output rate and exogenously given technology. But Armen, through work done by himself and others at RAND, realized that output rate alone could not explain several facts about the airframe industry, and he proposed that total output should be included in the firm's cost function. This made facts relating to the firm size, use of machinery, and learning over time much more understandable. He may not know it, but his presentation at the Northwestern seminar helped guide me some two and a half years later to the decision to leave my first job at the University of Michigan for UCLA. Armen, you may regret having given that lecture.
It is clear that Armen's mode of thinking begins by asking questions. one of the three jobs I held when I first came to UCLA was to consult at RAND one day a week. During lunch hour, I remember Bill Meckling, Armen and me shopping for a camera. We went from shop to shop. Armen would ask the shop keeper questions, questions, questions, questions, and he kept shopping, shopping, shopping. He never bought the camera. Similarly, he seldom buys the latest wrinkle on economic theory.
The innovative capability that showed itself in his work on production costs was no fluke. It reveals itself again and again in a variety of topics such as unemployment, inflation, property rights, and the firm. Confining myself to his writings on the firm, I note first Competition, Monopoly and the Pursuit of Profits, published in 1962 with Reuben Kessel as a coauthor. It examined the novel consequence of price regulation (or discrimination). Reuben and Armen argued that price regulation exacerbates discrimination by personal characteristics and they provided statistical evidence in support of their theory. The paper was eye opening in the conclusions it derived about discrimination, and it motivated me to write a paper, subsequently published in the North Carolina Law Review, on minorities in the marketplace. Production Costs and Economic organization (that's Armen's title), came out in 1972, coauthored by myself and Armen. Armen and I began this work in 1968 when Armen came to visit Chicago for a year as a Ford Foundation Distinguished Visiting Professor. In this role, his commitments were trivial, and it was quite natural for him to become aware of shirking behavior. In fact, we saw little of him on campus for many weeks. He claims he was down with a serious case of flu, and he even had his lovely wife Pauline join in this claim. once we teamed up to write this article, since it was a team, we both faced even stronger incentives to shirk. But there must be something to the productivity of team effort, even though neither Armen nor I practiced team writing very much, for this paper, as most of you know, has become a mainstay of the economics of the firm. The only aspect of this conuthorship that I regret is that Alchian begins with "A."
Without going into detail, certain contentions of the paper should be noted here. These are that team effort is productive, that it gives rise to shirking problems, and that the organization of the firm is at least partly explained by the attempt to mitigate these problems. Exacerbation of the shirking problems occurs precisely because it is a team that is at work. This makes it difficult to apportion product across individual workers. In the very next paper he wrote on the theory of the firm, Armen altered his position on this topic. In "Vertical Integration, Appropriable Rents, and Competitive Contracting Processes," coauthored with Klein and Crawford, the argument is that enlarging the size of the team through vertical integration ameliorates the problem of shirking across markets. Now when Armen and I wrote our paper on the theory of the firm, I was under the impression that we agreed that team production exacerbates shirking problems as compared with transactions across the market. In what might be described as an act of postcontractual opportunistic behavior, Armen reneged on this agreement in the vertical integration paper. In the vertical integration paper, market transactions are the source of shirking and team production is the cure. This paper is rapidly catching up in citations to our paper, so I am especially aggrieved.
I have not discussed one of Armen's more important papers relating to the theory of the firm, his classic "Uncertainty, Evolution, and Economic Behavior" that Jim referred to. This well-known paper, deserving of the attention it has received, delivers a perspective of competition that still makes waves in the profession. In an earlier session today, I delivered a paper devoted entirely to discussing this classic. I shall not repeat myself here.
As we all know, Armen's impact is not restricted to scholarly articles. His principles text, authored with Bill Allen, continues to serve an elite audience, and UCLA graduate students have produced a literature much influenced by Armen's teaching. He can be quite proud of what he has accomplished. His insights into the way the world works merit admiration and appreciation. Thank you Armen, and as a token of my appreciation, I have a stock tip for you...
John Lott: Thank you, Harold. Harold, as he said, has served double duty today. He just got off giving an earlier session dealing with Armen. I would like to invite Armen to respond to the various comments that have been made, to try to clear his name so to speak.
Armen Alchian: I suppose I should thank my mother and father like everybody else does, and God. But I do thank the people who are here for coming. I presume a lot of you are former graduate students otherwise I don't know why you would come. And you know I have abused you a lot. I used to enjoy class, because I could abuse you a lot. You were very tolerant. I thank you for having tolerated stat. I should express thanks to the speakers here. But I am not going to because I have a lot of stories about each one of them that I could tell you. I won't tell any, except one. It is my general premise that the university has two functions; I'm not sure which is the most important one. one is education, the other is a marriage market. And I am convinced that UCLA is a superb marriage market. My daughter married a man she met at UCLA. And I went to Hawaii once for a quarter and met a young lady named Lynn Shishido whom I seduced into coming to UCLA as a graduate student. She's now Bob's wife. And it stuck, which is also unusual. So my test of a first-class university is to ask the student alumni, "Did you marry a woman or a man that you met at the university?" And I would rate colleges on that basis. A lot of parents ask me about UCLA or Santa Barbara or Berkeley, and I talk about the departments. When I say, "You know, the people he or she is going to meet there are important," their eyes light up. When you mention the cohort of students with whom their child is going to associate, they understand that. When I talk about the departments and what they are like, their eyes glaze over, and I think that is a sensible response.
I would like to tell a story about Bill Sharpe. When he got his Nobel award, I ran to the library and got his dissertation. There was my name as thesis advisor, and I thought that's great. The odd part is, I didn't have much to do with that thesis. I had met Harry Markowitz at RAND and told Harry about this student working on financial aspects and said, "Harry, you get in touch with Bill Sharpe." And he made it go. But it's my name as the thesis advisor on the dissertation. That's very nice.
Now I express my gratitude to the students I had: they're the ones that count. It's the students you have that make the big difference. So I had planned, but I didn't have the guts to do it (which may surprise some of you who have been in some of my classes) to come here and start disrobing. Taking off this jacket, taking off my tie, then taking off my shirt, and ending up with a T-shirt that the UCLA graduate students have made this year, which indicates something about UCLA in the background. But what I have done is put on this shirt, in my hand, the signatures of my colleagues and all the graduate students I could get to sign, and some I have added myself. I have got some very distinguished names on it.
There is one tradition I have in giving public talks. It is always to mention my wife, and she is here. Thank you and good luck.
